But one other item has become more readily apparent since May: that investors are increasingly differentiating between AAA CLO tranches (or, at least, between what were originally AAA CLO tranches), resulting in their trading within a wider bracket. As we shall see, not all AAA CLO tranches were created equal.
The complexities in evaluating CLOs, or even CDOs in general, are not limited to making long-term assumptions on a potentially dynamic, managed pool. Nor are the complexities limited to the modeling of each deal’s intricate structural features, such as pro-rata sequential paydowns or BBB tranche turbo features. The language of the indenture – the CLO’s governing document – brings with it a host of nuances in interpretation.
Our most recent piece explores one of the more timely nuances: the varying natures of CCC-rated loan haircuts.
The full report can be read here: Special Report: CLO CCC Buckets - Key Variations in Terms and Performance
An excerpt from the piece:
"... an investor looking for exposure to a CLO that does not have aggressive deleveraging provisions would want a CCC bucket has some or all of the following features:
- is as large as possible (at least 10%);
- references Moody’s loan rating not CFR in determining which securities are in the CCC bucket (and that has as “flexible” a definition of Moody’s rating as possible);
- includes only purchased CCC securities in the CCC bucket;
- haircuts excess CCC securities to MV (with as “flexible” a MV definition as possible);
- is ambiguous on which securities fill the bucket first (or even allows low MV securities to fill first); and,
- diverts cash‐flow for reinvestment and never for deleveraging.
In contrast, an investor looking for exposure to a CLO that has aggressive deleveraging provisions would want a CCC bucket that has all of the following features:
- is as small as possible (no more than 2.5%);
- references Moody’s CFR and not Moody’s loan rating in determining which securities are in the CCC bucket (and that has an “unambiguous” definition of Moody’s rating);
- includes all CCC securities (including both purchased and downgraded CCCs) in the CCC bucket;
- treats excess CCC securities the same as Defaulted Securities and haircuts them to the lesser of MV and recover value (and that has a strict definition of MV);
- clearly fills the CCC bucket with only the highest MV securities first; and,
- diverts cash‐flow for deleveraging only and not for reinvestment."